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Dominate the Markets: How Mega-Cap Names Take the Lead by Market Cap

As competition in the stock market intensifies, the development of the mega-cap names is dominating the market. By definition, mega-cap names are those stocks that have a market cap of at least $100 billion and may include high-profile companies like Apple, Microsoft, Amazon, Google, and Alphabet. The increasing prevalence of these mega-cap stocks is significant as the majority of mutual funds, pension plans, and retirement funds are increasingly depending on these stocks for their portfolio. This has led to the market increasingly being dominated by these large cap stocks, as their performance is the major factor in the performance of these large funds. According to Forbes, in 2020 the S&P 500 was led by mega-cap stocks such as Apple, Microsoft, Amazon, and Alphabet. These four stocks accounted for 24.3% of the S&P 500, and their returns in 2020 could be seen as the driving force for the stock market’s rally. By contrast, the rest of the market excluding these four stocks rose by just 8.6% from the start of 2020 to the year’s end. Although such dominance in the stock market may be perceived as insignificant, there are few signs of these mega-cap stocks’ dominance changing in the near future. Currently, Apple is only the third-largest stock in the S&P at a market cap of $2 trillion. Microsoft has a market cap of close to $2 trillion as well, and Amazon is not far behind. Alphabet has a market cap of $1.4 trillion. This trend of mega-cap stocks dominating the market is not only being observed in the S&P 500. Several individual markets within the larger stock market are also showing a marked preference for these large stocks. For example, the Dow Jones Industrial Average (DJIA) and Nasdaq 100 have a higher number of mega-cap stocks than their smaller peer groups in the S&P 500. The implications for investors are significant. Since most investors are primarily focused on returns in the near term, a continued focus on these large stocks may lead to an increase in the prices of these stocks versus other smaller stocks. Moreover, investors should prepare for significant volatility as a result of these large stock’s dominance as any news or movement in these stocks can have a far-reaching effect on the rest of the market. It is clear that the continuing domination of mega-cap stocks in the stock market is likely to continue in the foreseeable future, and as such, investors should adjust their portfolio allocations accordingly. A special focus should be placed on a diversified portfolio with these mega-cap stocks, as well as other smaller stocks to spread out the risk. In conclusion, the continuing trend of mega-cap stocks dominating the stock market should be viewed with both caution and appreciation, as the large-cap stocks can provide significant returns, but may also come with increased risk. Investing with diversified portfolios that contain a mix of large and small cap stocks can help investors achieve returns while managing levels of risk.